Ignis' Ewing optimistic on US equities

There are encouraging signs for US equities over the coming months but investor caution is advised as the market enters a consolidation phase following a near 40% rally from its lows in early March, according to Ignis Asset Management.

Terry Ewing, co-manager of the Ignis American Growth Fund believes that with the focus in the US shifting from economic stabilisation to the sustainability of the recovery, the market is unlikely to pull back significantly over the next months.

He argues that signs of stabilisation in the earnings outlook are encouraging and while the results season included more earnings downgrades than upgrades there are positives for investors in the form of cyclical stocks.

"Following the downgrades, earnings are more likely to outpace expectations in both the second and third quarters with the biggest rises in more cyclical sectors. There is greater risk to fourth quarter earnings but this leaves the equity market with room for upside in the next few months."

Ewing says the rally to date has been dominated by financial and cyclical stocks and this needs to broaden if a sustained recovery is to be achieved.

"Most of the cyclical stocks are already being priced on 2010 estimates. It is too early, however, to have confidence in the 2010 economic outlook and earnings picture. The rally over the past two months has created a valuation premium for cyclicals over defensives but this is to be expected at this stage in the cycle."

Ewing adds that while China's re-emergence as a source of growth is a positive for investors, rising demands for raw materials have also boosted oil prices, which is already impacting the US consumer.

"In this environment, the Ignis American Growth Fund is maintaining its cyclical bias although it has reduced sector bets given the valuation discrepancy between cyclical and defensive stocks. The portfolio is focused on companies with significant upside to mid-cycle earnings and those that can gain market share amidst ongoing industry rationalisation and consolidation.

"Clear opportunities for investors are undoubtedly emerging. This optimism needs to be tempered, however, and the positive and negative drivers carefully monitored to gauge the sustainability of the recovery."